As a limited company director, you can pay more into your pension through your limited company than others and still claim all the tax benefits. However, there are limits. In this article, we'll look at how company pension contributions work.
Once you've set up your limited company pension, you can start to calculate how much your contributions will save in tax. For most people, self employed pension contributions are capped at either their yearly salary or £60,000, whichever is lower.
However, as a limited company director, your business can contribute into your pension without the salary restriction that other sole traders or self employed workers face. Contributions into your pension are tax-free up to £60,000 a year (for the 2023/2024 tax year) even if your profits total less than £60,000. Contributions above this will be subject to a tax charge.
If you have a large amount that you'd like to put into your pension scheme, then you may be able to take advantage of the carry forward rules. This allows you to make use of any unused annual allowance from the previous three years, provided that you were a member of a registered pension scheme during that time. You must first make use of your full annual allowance for the current tax year, before using any unused allowances from the previous three years.
You should also take into account the Lifetime Allowance and any other factors including whether you’ve taken any pension benefits from another policy.
For more information on this, head to our in-depth article on pension contributions for the self employed.
As a limited company director, you actually have a choice of paying into your pension from your salary, or directly from your company. But which is better for your bottom-line? Here's a quick breakdown of the rules and advantages of each to help you make the right decision.
Personal pension contributions will come from either:
Personal contributions are subject to the annual pension allowance. This means maximum you can contribute into your pension is £60,000 or 100% of your earnings (not including dividends). Your allowance resets at the start of every tax year.
Personal contributions benefit from tax relief on every contribution. You'll get a 25% bonus on everything you contribute into your pension - up to your annual allowance.
Higher and additional rate taxpayers can get an even more tax by adding their contributions to a self-assessment tax return. As you'll get tax relief on contributions, this means the maximum anyone can pay in realty is £48,000 - with £12,000 coming from tax relief.
Contributions made directly from your limited company work a little differently. Unlike personal contributions, the amount you can contribute in your pension from your company isn't directly tied to your income. The only limit is your £60,000 annual allowance.
However, any contributions you do make must be "wholly and exclusively" for your pension and not for any other purpose. Your available annual allowance may be weighed when deciding if the amount you are contributing is appropriate.
Company pension contributions are classed as a business expense and can be offset against your profit, reducing how much you'll owe in corporation tax. However, you will not receive any tax relief on these contributions when they arrive in your pension.
It's also worth noting that anything you take out of your business and put into your pension won't be liable to income tax or National Insurance. It will also avoid dividend tax.
Both methods of paying into your pension offer great tax benefits and help you keep more of what you earn. Which methods is better for you will depend on your personal finances and business' profits. Remember, you can mix both methods of contributing throughout the tax year - as long as you stay within your annual allowance.
For help maximising the tax efficiency of your contributions, we recommend speaking to a financial advisor.
With a Penfold pension, paying in through your limited company takes just 5 minutes. You can set up regular payments, or make one-off payments through bank transfer, Direct Debit or instant payments, all via the app in just one tap.
We already help thousands of directors every day gain full control over their finances. Penfold provides all the tools and support you need to track down old pots, make tax-efficient decisions and help your hard-earned money grow.
Set up your personal pension with Penfold today in just 5 minutes.